Returns At Shanghai @hubLtd (SHSE:603881) Appear To Be Weighed Down

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Shanghai @hubLtd (SHSE:603881), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shanghai @hubLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.069 = CN¥374m ÷ (CN¥7.4b - CN¥2.0b) (Based on the trailing twelve months to December 2024).

Therefore, Shanghai @hubLtd has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the IT industry average of 3.7%.

View our latest analysis for Shanghai @hubLtd

Above you can see how the current ROCE for Shanghai @hubLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shanghai @hubLtd for free.

What Can We Tell From Shanghai @hubLtd's ROCE Trend?

There are better returns on capital out there than what we're seeing at Shanghai @hubLtd. Over the past five years, ROCE has remained relatively flat at around 6.9% and the business has deployed 161% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Shanghai @hubLtd has done well to reduce current liabilities to 27% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Shanghai @hubLtd's ROCE

In conclusion, Shanghai @hubLtd has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 82% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Shanghai @hubLtd we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.